This article is only a personal trading study note and does not constitute investment advice. Trading involves risk. Make independent judgments and take responsibility for your own decisions.

How to use momentum structure to support market judgment.

This is an experiment Penchan has been working on recently, organized into an article for everyone.

Price Balance and Imbalance

When price is balanced in an area, it means buyers and sellers can almost match each other there, so price tends to hover nearby. On the chart, that appears as consolidation. When price is imbalanced, it means the same price cannot match enough buyers or sellers, leading to a sharp drop or sharp rise. On the chart, that appears as a large candle.

Imbalance Caused by Thin Liquidity or Large Capital Entering

A large candle clearly tells us that price has entered an imbalanced state. This usually comes from one of two things: (1) Liquidity is thin, so a market order causes a large price change; (2) the capital entering the market is large enough that even many resting orders cannot absorb it.

Imbalance appears on the chart in many ways. In addition to large candles, it can appear as FVG, Fair Value Gap, consecutive same-direction candles, and so on. These can all serve as characteristics of imbalance.

Example 1: Using Imbalance to Support Trend Judgment

Black-background candles weaken at the high and then show long bearish candles and gap-down sections, leaving several Momentum traces of price imbalance

Several traces of price imbalance can be observed on the chart. I marked them with directional lines.

Black-background candles use yellow directional lines to mark one sharp rally and several sharp selloff sections, corresponding to multiple price-imbalance traces

On the left side of the chart, price first rises, then hovers near the top and produces consecutive same-direction bearish candles, even engulfing the original upward Momentum. After that, two more imbalance events occur. At this point, we can notice that the imbalance is gradually weakening, and a reversal may have a chance to develop later.

After a long bearish candle on the left, two shorter downward arrow sections appear, followed by a sharp rally and pullback, matching a reversal after imbalance gradually weakens

In this example, imbalance gradually weakens, then price reverses upward. After that, one more imbalanced drop occurs.

Candles first mark a sharp rise and sharp fall with yellow arrows, then shift into small-bodied sideways movement on the right, matching a return to price balance after imbalance fades

The current chart is in a balanced state, meaning a consolidation period, with no obvious large Momentum appearing.

Example 2: The Second Stage of the 2021 Bull Market

In the second stage of the previous bull market, we can see that upward Momentum on the left gradually slowed. Even the Momentum that produced the 69K ATH was roughly similar to the previous push, suggesting Momentum was starting to run short. The market then developed MSB and a potential trend reversal. After that, the reversal structure formed, followed by a new trend and the December 4 crash.

Weekly candles in the later bull market repeatedly push upward with yellow arrows marking tops, then break structure on the right and continue falling, matching insufficient Momentum and trend reversal

Example 3: Current Market Condition

Weekly candles shift from a bullish rise on the left into a long decline, then form a small low-range consolidation on the right, used as a comparison case for current momentum structure

How does the current momentum structure look? That is for you to read.

Here are a few ideas. You can compare it with weekly rallies from past bull markets, or with the weekly structure after the previous bull market turned bearish. My drawing is only for reference: https://bit.ly/3CfyJ4T

Afterword

There is no single correct answer when drawing Momentum. You can test it through your own review experience and define rules for judgment. At the same time, momentum structure is mainly a supporting method for reading trend structure. I recommend using it together with market-structure trend judgment.

FAQ

Q: How is momentum structure different from normal trend analysis?

Momentum structure focuses on changes in the speed and force of price movement, not only direction. When Momentum weakens but direction has not changed, it may foreshadow a coming structural shift.

Q: Which markets are best suited to momentum structure?

It tends to be clearer in higher-volatility markets such as cryptocurrency and foreign exchange. In low-volatility sideways markets, Momentum signals may be less distinct.